ViewRay Inc (VRAY) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2016 ViewRay earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to The Ruth Group. Please go ahead.

Thanks, operator, and good morning to everyone. Welcome to the ViewRay first-quarter 2016 financial results conference call. Joining me from the Company are Chris Raanes, President and Chief Executive Officer, and David Chandler, Chief Financial Officer.

This morning, ViewRay issued a press release announcing its first-quarter 2016 financial results. A copy of this press release and the Company's Form 10-Q will be available on the Investor Relations section of the ViewRay website at www.ViewRay.com. We encourage you to review these documents.

This call is also being broadcast live over the Internet at www.ViewRay.com, and a replay of the call will be available on the Company's website for one year.

Before we begin, I would like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the ViewRay annual report on Form 10-K and subsequent reports as filed under the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 13, 2016. ViewRay undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

With that said, I would now like to turn the call over to Chris Raanes.

Thank you, and welcome to the ViewRay first-quarter 2016 conference call. I will begin with a quick review of the first-quarter financial results followed by a broader update before turning the call over to our CFO, David Chandler, for a detailed review of our financial results. I will then come back to make some closing statements and then we will open up the call for Q&A.

Turning to our first-quarter 2016 performance, revenue was $5.5 million. Let me start that paragraph again. Turning to our first-quarter 2016 performance, revenue was $5.5 million, reflecting an installation at VUmc in Amsterdam. Over the last three quarters ending March 31, we have doubled the MRIdian installed base to six systems.

We secured new product orders in the first quarter with $11.2 million representing two systems. As a result, our total backlog increased $89.6 million, representing 16 sales contracts as of March 31.

On the last day of the quarter, we began trading on the NASDAQ global market and on the next day, we rang the opening bell.

We have had tremendous momentum on the clinical front in the last several weeks. First treatments began a month ago, April 7, at the Sylvester Cancer Center at the University of Miami, where they are now starting to ramp up their clinical program. And, lastly, treatments began at VUmc, the free university medical center in Amsterdam.

VUmc has started treating patients with their SMART program, which stands for stereotactic MR-guided adaptive radiation therapy. The stated goal of SMART is to improve tumor control while reducing complications through the advantages of MRI-guided radiotherapy.

During the first quarter, we announced our development of an MRI-guided linear accelerator, a linac-based technology. We are planning to file our regulatory submissions in the second half of the year for FDA clearance and CE marking. Our scientists have solved the problems and patented the solutions of combining a linear accelerator and an MRI while keeping the same compact footprint as the current MRIdian system.

We have designed the linac to be available either as an upgrade to our Cobalt system or as a standalone system. This exciting development is important to our business for two fundamental reasons.

First, radiation therapy clinicians are accustomed to using linear accelerator powered systems. More than four out of five systems in use today are linear accelerators.

Second, we expect our MRIdian linac technology to have positive product gross margins from the start with further margin improvement expected as we scale up. We have already taken an international order for the MRIdian linac technology.

Our linac technology attracted a great deal of interest at the annual meeting of ESTRO, the largest European trade show for radiation oncology as Washington University presented on the first measured technical results of the fully functioning MRIdian linac technology under development, including beam data and images.

We doubled the previous year's number of hospitals sales leads from ESTRO and hosted a standing room only symposium on adaptive therapy with the MRIdian system highlighting case studies from three MRIdian sites, UCLA, Washington University, and the University of Wisconsin, showing the effectiveness of the MRIdian system as well as a presentation from VUmc on their preparations for the SMART program.

MRIdian was also the subject of five presentations at ESTRO covering clinical experience with lung, liver, and rectal cancers, specifically how MRIdian's ability to online, align, adapt, and track in real time during treatment can benefit patients. At our booth, we hosted daily presentations from four MRIdian centers covering SBRT, or stereotactic body radiation therapy, a short duration, high-intensity treatment. Because of the visibility provided by the MRIdian system, our centers are finding that they can treat more types of patients with SBRT than they can with traditional radiation therapy systems. SBRT is typically performed within a week, whereas traditional forms of radiation therapy take several weeks. Video of these presentations and the symposium can be found on our website under events/ESTRO.

The body's clinical experience using MRI-guided radiation therapy is building and much of this experience is summarized in a recent publication authored by UCLA covering a review of dozens of papers highlighting the multi-center clinical experience of MRIdian over the past two years. Let me take a moment to translate what this means in human terms.

I would like to share with you one patient's story that touched me this quarter. Dr. Percy Lee of UCLA treated a single mother with a Stage IV metastatic breast cancer lesion that was dangerously close to her pancreas, stomach, and bile duct. Neither surgery nor traditional radiation therapy was an option due to the tumor location and tumor movement. The surrounding structures very sensitive to radiation, so if the dose was off by even a few millimeters, it could cause severe damage. Dr. Lee chose to treat the patient with MRIdian because of its ability to overcome these challenges. Six months later, the patient went for a follow-up PET scan. The scan showed no cancer, showed complete biologic response to the MRIdian treatment. As you can imagine, both Dr. Lee and the patient are delighted.

Preliminary reports from our sites indicate that approximately 10% to 20% of the patients treated on MRIdian could not have been treated on other machines. This is the kind of story that illustrates why I and my colleagues at ViewRay do what we do. And I would like to thank them for their passion, their dedication and their creativity.

Finally, this morning, I would like to acknowledge two prestigious additions to our board of directors in the last few months. Brian Roberts and Hank McKinnell have joined the ViewRay board. Brian's background includes expertise in medical technology and extensive experience as a CFO in both public and private companies. Hank is the former Chairman and CEO of Pfizer and has vast experience in medical innovation and in running businesses. Their guidance and counsel will be invaluable as we seek to take ViewRay to the next level.

So, to summarize as I turn the call over to David Chandler for the financial review, we are pleased with our two orders and one installation for the quarter. Our clinical results are providing dramatic evidence of how MRI-guided radiation treatment helps cancer patients. And we are moving fast with our next generation linac technology.

David?

Thank you, Chris, and good morning, everyone. I will begin with a review of our new orders and backlog in the first quarter of 2016.

In the first quarter, we closed two orders for a total of $11.2 million. Total backlog was $89.6 million at the end of the quarter, representing 16 signed sales contracts. This compares to 15 signed sales contracts representing $84.4 million in backlog as of December 31.

Turning now to revenue, total revenue in the first quarter was $5.5 million compared to $280,000 in the same period last year. The revenue mix for the quarter consisted of $5.2 million for MRIdian products and $216,000 of service revenue.

Cost of product sales was $5.9 million for the first quarter of 2016 compared to $154,000 in the same period last year. We anticipate product costs to come down significantly when our linac technology becomes available, primarily because a high -- single high-powered linac takes the place of three Cobalt sources in the current architecture of the system.

Cost of service revenue was $601,000 in the first quarter of 2016 compared to $623,000 in the same period last year. As the volume of installations increases, we anticipate service margins will improve.

Operating expenses were $11 million in the first quarter of 2016 compared to $7.5 million in the same period last year. This reflects our investments in research and development of our products, sales and marketing, and higher general and administrative expenses associated with being a public company.

Interest expense was $1.1 million in the first quarter of 2016 compared to $484,000 in the same period last year. Our cash balance at the end of March was $5.7 million. In March, we amended the CRG debt facility, allowing us to draw $15 million now and a further $5 million upon meeting certain revenue milestones. In April, we notified CRG of our intent to draw down $15 million in funds, of which $5 million was received on May 9, and an additional $10 million is expected on or about May 20.

As Chris mentioned, we plan to apply for regulatory clearance this year on our MRI linac technology, which we believe will broaden our market, accelerate sales, and backlog conversion and improve margins. As we continue to advance our linac technology, we believe it may cause greater than normal quarter-to-quarter fluctuations as some customers may opt to wait for the linac rather than install Cobalt, while others will elect to install Cobalt and, subsequently, upgrade to the linac. Accordingly, we think it is likely that we will not recognize system revenue in the second quarter.

I will now turn the call back over to Chris.

All right. Thank you, David. In closing, we are very pleased with our clinical results, with our linac technology development, and with our first quarter's orders and installations. I look forward to keeping you updated on our progress and I now will open up the call for Q&A. Operator?

(Operator Instructions). Suraj Kalia, Northland Securities.

Chris, on MRIdian linac, can you give us an idea about the requirements of 510(k) application later this year?

Requirements for the 510(k). Let me start a little broadly there. So, a 510(k) clearance, which is typical in the radiation therapy industry, requires a predicate device and you compare your current device to it. The predicate device for the current MRIdian system, which is based on Cobalt, is a linear accelerator.

What we are doing with the next generation is simply changing the output radiation from a Cobalt source to a linear accelerator. So, in essence, we are going closer to our original predicate device. There is a certain amount of technical testing that has to go along with that. You have to measure the various fields and show the different performance. The main type of characteristics are you need to show that the beam is undistorted by the magnetic field, which our system (technical difficulty) as we talked about the whole magnetic strength that we have chosen and the architecture that we have chosen. And that is really -- it is a pretty straightforward sort of problem. That is what we are doing.

So just so that I understand this, forgive my belaboring at this point, Chris. Specifically on interference of the EMF for radiation, what you are saying -- it doesn't require any sort of clinical testing or no?

So, very clearly, there is no clinical testing required. We prove -- you prove that the technology and the outputs are essentially equivalent. What you show -- and I am not an expert on 510(k) testing, but I have done a fair amount of this sort of thing -- you show that the beam quality is equivalent or better. In other words, the way the radiation launches into the system is equivalent or better and, therefore, is the same as the predicate device and then you do the same thing on the imaging side. You show imaging (technical difficulty) or better.

And if you recall, from the technologies that we talked about at our presentation at the various conferences, the two key technologies are we have magnetic shields that allow the linac to work in the magnetic environment without any distortions that all, and then we have RF shields and absorbers that allow the MRI to work in the presence of the noise created by a linac.

Got it. Chris, one question for you and one final question for David and then I will hop back into queue. From what you are seeing on the (technical difficulty) can you give us a very high-level perspective on what the puts and takes are of the market moving later into FY 2016 and FY 2017? And the reason I ask is you see some of the competitors' order numbers have (technical difficulty) softening, at least from a growth perspective. And that is for you, Chris. And, David, just if you could remind us of the way you all calculate your backlog, that would be great. Gentlemen, thank you for taking my questions.

Okay. No problem. Market conditions, I am not sure I can comment on the overall. We are seeing this tremendous uptick in interest in activity around the announcement of linac. So, to us, it looks like market conditions are very, very good and there is plenty of room for growth. Unfortunately, when you're in the middle of something exciting like that, it is hard to (technical difficulty) it and be able to tell what the overall market looks like. We are seeing an awful lot of activity right now.

There was a question about backlog.

Yes. So backlog is a very important metric in our industry, of course. To qualify as backlog for us, it needs to be a signed -- firm, signed contract with a substantial deposit. They are, by definition, noncancelable under their terms, but, of course, it is a tight community. I think, if a customer really, really wanted to get out, then we would look at negotiating that, but they are non-cancellable under their terms. From our perspective, the customer or distributor has to have the ability and intent to deploy that system. So, it is pretty tight criteria from our perspective.

(Operator Instructions). Raymond Myers, Benchmark.

I have a specific question, Chris, about specifically your clinical experience in lung cancer, given the fairly recent guidelines for screening of patients with 30 pack years of smoking.

Okay. So, specifically about what is going on with lung, so lung is one of the major indications that we are seeing treated at the various centers. And different folks are looking at it in different ways.

But let me give you a little bit of flavor. One of the advantages with our system and one of the things we are hearing consistently from multiple sites is that, given the visibility, being able to see the tumor and all of the critical structures nearby, physicians, clinicians are feeling comfortable performing that SBRT type of treatment, the high intensity, short duration treatment on a wide variety of lung tumors. In other words, you will hear other people say with different kinds of systems that they do lung SBRT. In those cases, they are almost always treating a tumor that is in the middle of the lung. There is no critical structure nearby and you can afford to be a little bit sloppy in the treatment.

With our system, because you can see so clearly and you get that image while you are treating, you know you are hitting it, they feel very comfortable being able to treat those kind of tumors that are close to critical structures. So close to the [mediasign] and close to the heart, close to the esophagus, or heading the other way, close to the periphery to the surface of the lung. And by being able to track while they are treating and adapt every day before treating, they are able to watch these tumors shrink in size, bring the margin in. And what it does is it expands the number of lung tumor cases that can be treated with radiation therapy. That is probably among the most exciting things I hear our users talking about.

That's great. Thank you. And then maybe a quick financial question. You may have addressed it before I was able to get on the call. But is there an opportunity for some of these orders to have any prepayment or down payment to help you to bridge yourself to cash flow breakeven?

Let me take that. And it is a really good point. There are multiple sources of cash that come into the Company. Obviously, David talked about the ability to draw on the CRG loan. There are, in fact, deposits that come with new orders. Some of our contracts are structured with progress payments. Many of our international shipments come with letters of credit that are collectible upon shipment. And, in that case, the cash actually comes into the Company before the revenue because the installation follows after that. So yes, your point is very, very good. There are many ways that cash flows into the Company.

Okay. That's helpful. Thank you guys.

Sebastian Walker, UBS.

Just going back to MRI linac, I was wondering what kind of ramp up you are expecting here in terms of production. Could we get some kind of indication of how many systems you might be able to deliver in the first or the next few years after the clearance and the launch? Thanks.

Sure. No, thanks for the question. So we are in a position where we are not giving guidance right now, and I have to respect that. Maybe I will talk about it from a capability point of view. If you remember, we behave more like system integrators than manufacturers. We get our components and major subsystems from various suppliers. And they are all from big, capable manufacturers. So, our ability to track with the ramp is not going to be at all limited by anything on the manufacturing side and it will be up to the market. And we will give some numbers probably as we get closer to the time when we launch the product.

Perfect. Thank you.

And I am showing no further questions at this time. I would like to turn the conference back over to Mr. Raanes for closing remarks.

All right, operator, thank you very much, and everybody on the line, thank you very much for joining us today. I appreciated the questions and I look forward to keeping you updated as we make progress going forward. Have a good day, everyone. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.